How to Buy a Home & Pay Off Bad Debt

by HomeLoan.com

Credit card debt and personal loans are largely considered "bad" debt. Not only do these lines of credit, in many cases, carry high interest rates, but neither improves your financial position. The kind of loan, or debt, that improves your financial standing is a mortgage loan; which after the loan is repaid names you as the owner of the property. If you want to buy a home and pay off outstanding debt, your best course of action is to contact a lender and work with a financial planner to determine the best way to pay off bad debt and make your mortgage payments on time.

Things You'll Need

Credit report

Credit score

Loan application

Step 1

Work with a credit counselor or financial planner to determine how much debt you owe. Write the name of each creditor; order each name on your list from highest balance and highest interest rate to lowest. Include all credit cards and other personal loans. Write out the outstanding balance that you expect for the current billing cycle.

Step 2

Contact TransUnion, Equifax and Experian, the three credit reporting bureaus in the United States, to obtain a copy of your credit report and obtain your credit score. Study your credit history before you speak with a lender, so you can negotiate the best mortgage loan for your level of credit.

Step 3

Contact your local bank manager and request a line of credit for the property you wish to purchase. Decide between an adjustable or fixed rate loan. Determine if down payment options (if applicable) are available. Choose a term option. The most common term option is 30 years.

Step 4

Pay off the debt that carries the highest interest rate first. When you completely pay off this balance, go to the next highest interest rate. For a significant amount of debt, consider debt consolidation--an agreement by which your creditors accept a reduced payment for the debt you owe.

Step 5

Keep all credit accounts open to avoid a drop in your credit score.

Tips and Warnings

Local and online banks offer mortgage loans for applicants with bad credit. The interest rate is generally higher and restrictions apply. A co-signer may be necessary.